Tuition costs are rising every year, and many concerned grandparents want to help finance their grandchildren's education. And it would provide a double bonus if these educational gifts were also tax-deductible. Unfortunately, gifts given directly to another person are not tax-deductible. However, there are other tax incentives for grandparents who want to help foot the college bill.
Coverdell Education Savings Accounts
Also called education IRAs, Coverdell Education Savings accounts offer a deferred tax break. You cannot deduct contributions to a Coverdell account on your taxes. However, distributions are tax-free as long as you use the funds for qualified education expenses such as tuition, fees, books, and room and board. You can deposit up to $2,000 per year in a Coverdell account for each beneficiary. However, you must have earned income in order to contribute.
State College Savings Plans
All 50 states and the District of Columbia offer a state college savings plan, also called a 529 plan. Like Coverdell accounts, contributions to these accounts do not provide an immediate tax break. However, earnings are exempt from federal tax as long as the money is used for educational expenses. In addition, earnings are often exempt from state tax. Your state may also offer additional incentives for investing in a 529 plan, such as matching grants.
American Opportunity Credit
The American Opportunity Credit offers a tax credit of up to $2,500 per student for taxpayers with a modified adjusted gross income (MAGI) of $80,000 or less. Grandparents can only take advantage of this credit if they can claim their grandchildren as dependents on their tax returns. The credit applies to 100 percent of the first $2,000 spent on tuition, fees, books and required course materials, and 25 percent of the next $2,000. It is only available for the first four years of a student's college life.
Lifetime Learning Credit
The Lifetime Learning Credit offers a tax credit of up to $2,000 for education expenses. Like the American Opportunity Credit, grandparents can only take advantage of the Lifetime Learning Credit if they can claim their grandchildren as dependents on their tax returns. However, there is no limit to the number of years you can claim the Lifetime Learning Credit. You cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year.
- Grandmother and grandchildren image by Marzanna Syncerz from Fotolia.com